Today's Headlines

MarketMinder's View:The passing of the first man to orbit the Earth—a genuine American hero—brings to mind a couple points that are relevant for investors. First of all, we’ve seen an amazing amount of technological development since the Mercury Seven came on the scene. So much that, while the world was transfixed and amazed by Glenn’s feat in 1962, most now see space travel as old hat. Where people watched Friendship 7 lift off on their small black & white TVs, today we see reports on the latest photos from deep space on our snazzy OLED flat screens. If you ever visit the Johnson Space Center in Houston and see the original Mission Control room—preserved with its original consoles—you will be shocked at how low-tech it all is. You’ll probably think your phone is more powerful than those old clunkers. When you own stocks, you own a share in all that progress and the amazing profits it generates. Second of all, historically, one hallmark of a soon-to-peak bull market is the rise of “heroes” who transcend ideology and their chosen field. It’s just part of the euphoria that typically accompanies market peaks. These days, our skeptical society has no mass heroes and a wealth of supposed villains, an anecdotal sign this bull market likely has room to run. Anyway. Here’s to a man whose name is “now part of the American vocabulary for a nation of dreamers, strivers and achievers.” May the best of your past be the worst of our future.

MarketMinder's View:Based on this article alone, you’d think US politics are the market’s only driver and stocks have had some ginormous rally since the election. Neither is true. For all the hype, the S&P 500 is up only 5.2% since November 8 (through Thursday’s close, per FactSet). That’s a fine return, don’t get us wrong, but it isn’t astronomical. We’ve had single weeks bigger than that. And as for market drivers, there is a whole, huge world economy out there, and it is growing. Many data points suggest it is starting to grow a touch faster, even. As a result, corporate earnings are improving and poised to get even stronger. This is what stocks are pricing in, while they keep a wary eye on the next administration (and politics globally). To say they aren’t taking Trump seriously ignores the counterfactual: Maybe stocks would be up far more if Trump weren’t jawboning about trade with Mexico and China. There is no way to know! As ever, we urge investors to watch what politicians do, not what they say. Speculation and jawboning aren’t reasons to avoid stocks now. If actual protectionist risk becomes real, there will be plenty of time to make portfolio adjustments if needed. For now, be patient.

By Jillian Ambrose and Christopher Williams, The Telegraph, 12/09/2016

MarketMinder's View:As always, we don’t recommend individual securities—not buying, selling, holding, gifting, selling short, free-delivering or otherwise transacting in any of them. We highlight this solely as yet another example of firms’ eagerness to call the UK their home in the wake of the Brexit vote. “Announcing a radical shake-up to its corporate structure, central to which is shifting its tax domicile from Luxembourg to the UK, the company backed Britain’s prospects post-Brexit, saying its strengths would endure after it leaves the bloc. ‘The reasons for changing the location of the corporate structure to the UK were sound before Brexit and remain so beyond it. These strengths are unlikely to change as the UK negotiates leaving the European Union,’ said a McDonald’s spokesman. McDonald’s is the latest multinational company to up its invest in the UK since June’s Brexit vote, following a string of technology giants including Apple, Google and Facebook.”

MarketMinder's View:Indeed it probably won’t, because several non-OPEC nations likely jump at the chance to gain market share, as evidenced by US drillers’ recent actions. OPEC wants to cut a deal with select non-OPEC nations, too, and is meeting with several this weekend. But anything agreed likely proves feckless. “‘We don’t think too many non-OPEC countries actually have the power and will and influence over the oil companies to actually hold back barrels,’ Per Magnus Nysveen, senior partner and head of analysis at Rystad said.” Like, can anyone actually envision Donald Trump calling Exxon and saying “Hey can you stop drilling? OPEC wants you to. Mmmmmkay? Thanks bye.” In other words, don’t expect oil prices to soar any time soon.

MarketMinder's View:Korean lawmakers officially impeached President Park Geun-hye on Friday, leaving her fate in the hands of the Constitutional Court, which has 180 days to weigh her case and vote. Presuming she is removed from office, there will be a snap election within 60 days, and in the meantime, Prime Minister Hwang Kwo Ahn leads a caretaker government. The political turmoil has rocked the nation, but stocks have taken it in stride, once again proving shock political events in otherwise growing and competitive nations aren’t bull market killers. Korean stocks wobbled when the scandal first broke in late October, but they turned around in mid-November and presently sit above pre-scandal levels (when measured in local currency, to remove skew from the dollar’s rise, which weighs on US investors’ foreign returns). Don’t overrate political events when assessing stocks’ risks, particularly when they are localized. Economic and sentiment drivers matter, too, and it’s a big world. For more, see Austin Fraser’s research analysis, “A Political Update From Korea.”

MarketMinder's View:That distinction is—wait for it—political systems “displaying superior levels of stability, effectiveness, and predictability of policy making and political institutions.” Their evidence, of course, is Trump, Brexit and Italy. This evidence sort of doesn’t hold up. Are US institutions and political stability less sound than they were when Clinton was impeached or Nixon resigned? Is Italy, with its 63 governments in 70 years, really less stable today than last year? Are institutions truly weak in Britain if the Courts are carefully considering arguments from all players over the appropriate Brexit procedures? And are any or all of these truly less stable than politics in Emerging Markets? Because last we checked, China had a dictatorship, and Turkey is heading that way as its strongman president seeks to rewrite the constitution. He also purged tens of thousands of police officers, journalists and professors after an attempted coup in July. The Philippines’ new president is presently overseeing the extrajudicial executions of thousands of suspected drug users or dealers without due process. South Korea and Brazil impeached their presidents amid corruption scandals this year. South African President Jacob Zuma is also mired in scandal. India suddenly announced large banknotes were no longer legal tender. Any time Thailand tries democracy, its military gets bored, stages a coup and takes over. They’re running a junta at the moment. Need we go on? We aren’t trying to cast aspersions on any of these nations, some of which happen to be great investments for anyone into Emerging Markets these days. But there is a chasm between the quality of their institutions and those in the developed world. The fact a credit rater claims otherwise speaks volumes about credit ratings accuracy in general.

MarketMinder's View:While we quibble with some of the details, the broader point is sound: While experts warned victories for Brexit and Donald Trump and defeat for Italy’s Matteo Renzi would take global markets down in spectacular fashion, stocks bounced after all three. Investors who based decisions on those ill-conceived warnings got whipsawed. Remember this next year, as you inevitably hear similar warnings about populists storming the French, Dutch and German elections.

MarketMinder's View:This raises an important question and offers some interesting anecdotes, but the discussion and takeaways are less than satisfying. We more or less agree that speculators are looking to make quick killings or gains light years above and beyond the market’s norms, while investors are more grounded. But some of the specifics are just slightly off. The article claims you are a speculator if “you buy an index fund because you think that’s a safe way to earn annual returns of at least 10% a year” even though stocks are at all-time highs. But you aren’t even necessarily a speculator, just of the mistaken belief that stocks are ever “safe” and that you should anticipate averages, year in and year out. It argues you’re investing if all-time high stocks make “you worry instead and look to rebalance your portfolio by selling some of what’s gone up and buying some of what’s gone down.” But the fact is you are making a textbook behavioral error of trading based on past performance and meaningless index levels, which both investors and speculators do, in our experience. And while carving out a teensy portion of your portfolio as “mad money” might seem like a harmless way to indulge your inner speculator, how can you be sure pride accumulated from one success won’t infect your decisions on your theoretically “sane” money? Instead of gimmicks and litmus tests like these, just focus on thinking long-term and setting realistic expectations, and always remember you could be wrong.

MarketMinder's View:When Matteo Renzi tried to resign as Italian Prime Minister Monday, the president asked him to wait until after Parliament passed a budget, which they did Wednesday. But now it seems the president has asked if Renzi would serve if he were reappointed, or if he would prefer to designate a successor, and Renzi hasn’t yet decided. Regardless of the eventual leader, it seems increasingly likely Italy’s next government will have a narrow mandate to reform electoral law—in other words, the status quo. For more, see Monday’s commentary, “Italian Referendum Fails, Stocks Smile.”

MarketMinder's View:UK exports hit a record high in October, rising 4.6% m/m, and the Office for National Statistics wants you to know there is only “limited evidence so far that the depreciation of sterling” is why. Rather, there is a pickup in trade globally, and the UK is reaping the fruit. Imports were less stellar, however, falling -3.6%. However, over half of that fall was due to “erratics” (e.g., ships, aircraft, precious stones, silver and non-monetary gold), which fell -53.8% m/m. Excluding that category, imports fell a milder -1.7%, while exports were even stronger (5.1%). For good or ill, October is just one month and in line with UK trade’s choppy long-term trend.

MarketMinder's View:Here is why you shouldn’t read much into the fact that corporate insiders are selling shares at breakneck speed: “Some insiders could be locking in profits or exercising options that are close to expiration. Many banking executives in particular have held underwater options in the years following the financial crisis. Bank of America Corp. and Morgan Stanley, for example, have rallied back to mid-2008 levels. If this postelection rally was the first chance to sell, it is hard to argue against doing so no matter how they feel about the future. That activity differs from more-diversified mom-and-pop investors.” The only thing we’d add to this is that this isn’t unique to now. You never know why a corporate insider sells, and it could be due to any number of personal finance-related reasons that say nothing of the company’s future.

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MarketMinder's View: Many still seem to buy the antiquated notion China trades unfairly by keeping the yuan artificially low, thereby undercutting goods produced elsewhere. That may have been partly true in, say, 2005. But it isn’t 2005. “These days China is intervening in the capital markets to prevent the yuan from going into free fall. The currency is now close to an eight-year low, down 12% from its peak in January 2014. One irony is that Mr. Trump is contributing to the yuan’s fall with his critical tweets about China, as traders see economic trouble ahead. The Chinese government has tried to slow the yuan’s fall by selling dollars—in essence manipulating the currency in the opposite direction of Mr. Trump’s accusation. As a result, China’s reserves have shrunk to $3.05 trillion in November from $3.99 trillion in June 2014.”

MarketMinder's View: The indicator is the Shiller P/E, or cyclically adjusted price-to-earnings ratio, or CAPE, and this is a wholly misleading analysis for three primary reasons.

It overlooks a slew of false reads at these levels in the monthly series during much of 2004 and 1996 through 1999. That many errors should give you pause.

The Shiller P/E, which compares prices to 10-years of bizarrely inflation-adjusted earnings, is highly skewed and backward-looking due to the calculation. It also wasn’t created to foretell cyclical turning points, but rather, to set expectations of the next decade’s returns, which it also doesn’t do well.

Even if you knew for a fact the next 10 years would be awful, that isn’t actionable information in the sense you don’t know the progression. The first seven could be great and last three awful. Wouldn’t you want to capture the first seven and then take action? Additionally, you’d have to know what your alternatives were throughout that period, and this doesn’t help.

MarketMinder's View: This article spends a great deal of time debating whether the slower monthly pace of bond purchases by the ECB is the same as tapering by the Fed in 2014, prior to it ending its quantitative-easing bond buying. Here is a hint: It is. The only difference is they also tweaked the target of purchases, allowing the ECB to buy debt with maturities as short as one year. The effect of that seems to be even further reducing pressure on long-term yields. Now, here is the key thing that this article gets exactly wrong: There is no evidence the ECB’s QE is or was stimulative, and much more evidence that tapering and ceasing QE in the US and UK led to faster loan growth. Hence, fears over what to call this—and admit it is tapering—are wildly, horribly, remarkably off base.

MarketMinder's View: When Japanese Q3 GDP was initially estimated at 2.2% annualized, we told you on these pages that “a look under the hood” suggested weaker conditions than the headline data. That is still the case, if not more so, even after the headline figure was revised down to 1.3%. Net exports were the biggest growth driver, with falling imports inflating a contribution from rising exports. Business investment was revised from flat to -0.4%, and consumer spending was quite weak. Inventories, which are subject to interpretation, were also revised down—and considering the long-running weakness in consumption, that seems to us to signal businesses’ outlook isn’t bullish. That said, revision to GDP’s methodology bullishly discussed here (adding R&D to business investment) is oddly off: “‘GDP growth wasn’t quite as strong last quarter as initially reported, but this was more than offset by upward revisions to previous quarters,’” said a guy paid to analyze economic data. Refining a metric is fine, but presuming that an ongoing weak trend is somehow overridden by methodology changes impacting mostly the levels of GDP from years ago is bizarre.

MarketMinder's View: Nope, it didn’t. This article suggests that Donald Trump’s win a month ago triggered investors to shift $2 trillion from bonds to stocks, fueling the alleged “Trump rally.” But the data offered—Bloomberg’s measure of world stock market capitalization and the Barclay’s Global Aggregate Bond Market Value—can’t tell you that. You see, they aren’t a measure of investor activity—a flow of funds—as they don’t separate out price movement. (Actually, it is mathematically impossible for any amount of money, big or small, to move from stocks to bonds, as there is a buyer for every seller.) And, contrary to common wisdom, the stock market (and bond market) are auctions that do not require an influx of new cash to rise. Furthermore, we’d note that the trend post-election doesn’t materially differ from the post-correction, post-Brexit rally that preceded it. Don’t overrate The Donald’s market impact. For more, see today’s cover story, “On the Trumped-Up Rally.”

MarketMinder's View: This article cites a bunch of data points (retail sales, GDP, late-lagging employment data) to argue that Britain’s economy will nosedive in 2017, as the sole reason it hasn’t to date is the weak pound and BoE’s accommodative policy. Yet it does so citing a lot of opinions and forecasts from folks that largely didn’t foresee continued growth after Brexit, and takes data out of context. After all, new export orders’ ticking down from a 5 ½ year high in a Purchasing Managers’ Index doesn’t suggest weakness ahead. It doesn’t even suggest slowing, considering PMIs measure breadth of growth, not magnitude. With markets rising, the yield curve steepening, Leading Economic Indexes in uptrends and the new orders gauges expansionary, there just isn’t evidence a downturn is drawing near.

MarketMinder's View: For all the talk of slow economic growth based on metrics like GDP (which is a dubious measure of actual economic health, particularly private-sector health, for many reasons), consider this: In the last two years, US service sector revenues grew an average 4.3% y/y, which doesn’t seem terribly slow. Services firms represent the lion’s share of the US economy, and their sales are arguably a much better metric of their health than GDP (which includes public sector stuff, wacky accounting for the financial sector and more). Hence, this is yet another reason to question whether GDP is sending correct messages about the private economy and perhaps shows why this bull market has consistently looked at slow growth fears tied to GDP and yawned.

MarketMinder's View: There has been much debate over whether the May government should be required to publish a white or green paper (those are just names for technical discussions—the color isn’t significant) regarding its Brexit plans, with many in Parliament pushing for this to add clarity. Now, they didn’t get what they want here per se, despite the title of this article. Rather, what they got was an assurance from first minister for all things Brexit-related David Davis that Parliament would get to vote on whatever plan results from the talks between Britain and the EU. Of course, the matter of whether or not Parliament must authorize the government invoking Article 50 is still pending a Supreme Court decision. However, this should assuage some opposition to the government invoking it unilaterally, considering Parliament will eventually have its say.

MarketMinder's View: In dollar terms, the headline is true enough—November Chinese exports eked out a 0.1% y/y gain, the first positive read since March. (In yuan terms, exports rose 5.9%.) But perhaps the bigger takeaway here is imports, which surged 6.7% in dollars and 13.0% in yuan—a sign of healthy domestic demand. Moreover, both imports and exports beat all 43 economists’ forecasts. While it’s just one reading, this report is a microcosm of weak sentiment and a brighter reality in China.

MarketMinder's View:Look, we’re bullish too, but neither of these indicators is predictive for stocks. Citi’s Economic Surprise Index is nice confirmation that data have beaten expectations, but stocks have long since priced in whatever those economic reports show. As for Morgan Stanley’s proprietary leading trade index, the cited inputs (Baltic Dry Index, oil prices, the dollar, ISM Manufacturing and business sentiment) are coincident at best, and each has been disproven over time as a leading indicator. Again, we’re not trying to rain on anyone’s parade, but knowing good data from bad is vital whether or not you agree with the conclusions.

MarketMinder's View:That is health care costs. “Forty-eight percent said they don’t speak to their financial advisor about these costs because ‘it is a personal issue’, the survey said.” Don’t let this be you! Health care can be a huge financial burden for retirees, especially as we’re living longer. The Bureau of Labor Statistics even keeps an Experimental CPI for Americans 62 Years of Age and Older in recognition that medical care inflation is a lot higher for older folks. Rather than wait for the government to get on it, “talk with your spouse and children, and then meet with an advisor who can help draft a plan for tackling those expenses.” Underestimating expenses in retirement, whether health care or otherwise, can increase the risk of depleting your portfolio.

MarketMinder's View:In any given year—every year in fact—a well-diversified portfolio will underperform some of its underlying assets, which as this article points out, isn’t fun. It’s math. Investment is knowing that and not chasing heat. For example, with US stocks outperforming in recent years, investors are increasingly tempted to shun non-US stocks and go all-in on Uncle Sam. But this is dangerous. “It’s easy to say that you’ll be happy only investing in U.S. stocks today because it feels much better when you’re invested in the best performer as opposed to the worst performer. It may not be all that easy when the cycle inevitably turns, and it will turn at some point. The U.S. doesn’t have a monopoly on stock market returns, profit growth, dividend payments, innovation or good ideas.” Stay patient, and look forward, not backward.

MarketMinder's View:Fear abounds that President-elect Trump will agitate markets by upending trade agreements and intervening with US firms and picking winners and losers, and that is a risk to watch. However, historical precedent (and Trump’s likely desire to be re-elected) provides reasons to be cautiously optimistic: “Donald Trump is following much the same political blueprint his predecessor and longtime adversary laid out years ago, signaling he’ll actively intervene in the U.S. economy while antagonizing free-marketeers who say his meddling will end in disaster... But once Trump actually takes office and becomes responsible for the entire economy, Burton said, it becomes ‘less practical to fight company by company to make meaningful impact.’” As we’ve noted, the economy is doing fine. The president-elect presumably would like to keep it that way, which probably means not doing too much to rock the boat.

MarketMinder's View:So after being named Time’sPerson of the Year—vindication!—President-elect Donald J. Trump says in the interview, “I’m going to bring down drug prices,” which promptly causes drug-related stocks to sell off. Like with his recent criticism of Boeing, this is probably an overreaction. First, this isn’t new. Trump said this on the campaign trail, too. The question, as with all these things, is: How big a priority is this to him? We’ll have to wait and see. Second, drug pricing regulations require legislation, and Congress seems unlikely to jump on board, considering how many GOP lawmakers opposed similar rhetoric from Trump’s opponent. Regardless, this won’t be a presidential edict. Realizing that, drug stocks have since recovered. Moreover, there is more than one way to skin a cat. Streamlining the regulatory process and making it easier to bring drugs to market would reduce prices, too, and it would be a net benefit for Pharmaceuticals.

MarketMinder's View:We’ve seen multiple iterations of this same argument over the last five years at least. The claim now, as then, is that stagnant productivity “is likely to continue, deepening the malaise that has left the middle class so dissatisfied,” because innovation is stalling out and new technology doesn’t pack much of a punch. Never mind that productivity is a poor guide to how the economy is doing or will do, or that technology often impacts life in ways data can’t measure. Markets, in our view, are a better predictor (forward looking as they are) of innovation and growth to come, especially when left to their own devices. Here we agree with the article that “regulations could hamstring tech companies accustomed to launching products on their own schedules.” But in competitive developed markets like America, the UK and most of Western Europe, this is a negligible headwind. (And as a sidebar: We advise being biased to skepticism of any argument that human creativity is reaching its limits, which is basically the core fallacy of this line of thinking. Anybody remember Peak Oil? Anybody?)

MarketMinder's View:The headline claim is based on an index of uncertainty that hinges on newspaper coverage of things like fiscal fights and political debate, which is presently higher than in 2008. If you think now is more uncertain than 2008, you are doing this whole uncertainty thing wrong. That is probably why market risk spreads don’t reflect the uncertainty index’s heights. When markets and contrived measures like this are at loggerheads, you should usually trust markets. They are extraordinarily good at pricing in political events and getting on with life. As our boss Ken Fisher would say, it’s what they do for a living.

MarketMinder's View: Though specific to Trump and trade, this is a nice reminder of the difficulty any president has translating campaign trail bombast into law. Mr. Trump has stated he would impose massive tariffs on US companies guilty of the heinous crime of providing American consumers with the goods they want at attractive prices while trying to stay afloat—err, we meant shifting production overseas. But for the most part one cannot simply slap tariffs on individual companies and goods from the Oval Office. Excluding extreme circumstances, “The power to levy taxes belongs to Congress, not the executive branch. Any tax bill must originate in the House and would require Democratic support to muster the 60 votes required to move forward in the Senate — an unlikely proposition.” Yup—and plenty of Republicans in the House (including the chair of a committee that would have to approve tariff measures) aren’t gaga about the idea. Even if it did pass, the WTO would likely have something to say about it. Checks and balances frequently trump politicians’ (not so) grand plans.

MarketMinder's View: Italian voters enjoyed an outing to the polls this Sunday, where they rejected Prime Minister Matteo Renzi’s attempt to beef up the executive branch’s authority. Stocks saw this coming, and had a fine day yesterday. But some worry the referendum’s defeat (and Renzi’s resignation) means the country’s troubled banks are even more troubled, ratcheting up risk on Italian government debt to boot. Where does this lead? “To a Troika-style take-over of the economy,” “a full-blown recession” and maybe a “popular insurrection,” apparently. To this we say, slow down! For one thing, Italy gets a new government almost as often as most people make new years’ resolutions—which is to say, every 1.1 years. Renzi’s resignation (the Renzignation?) is politics as usual. Second, markets have dealt with the back-and-forth over how to clean up Italy’s banks for years now. Things today aren’t materially worse than a year ago, when a botched attempt to bail in some banks’ junior bondholders wiped out many savers, often with tragic (on a personal level) consequences. The political faces might have changed this week, but the calculus is the same. From here, maybe banks keep swapping debt for equity, maybe creditors take some losses, or maybe the Italian government lends a hand. Regardless, this is a big tempest for a teapot that’s sub-1% of developed country equity markets and about 2% of global GDP. Italy’s problems aren’t big or surprising enough to wallop global markets.

MarketMinder's View: This argument for preserving the Consumer Financial Protection Bureau in order to save innocent people from supposedly predatory lenders is based on a fundamental fallacy: the belief “big banks, with their implicit guarantees of future bailouts, have an incentive to take more risk than is good for society.” First of all, there is no implicit guarantee of future bailouts. Too big to fail was always a myth. Second, there is no level of banking system risk that is inherently good or bad for society, and banks don’t have incentives to bet the house on an army of unqualified borrowers. Their motivations are a) staying in business and b) profiting, which implicitly encourages them to carefully balance risk and return. Ideal financial regulation provides guardrails and a lender of last resort to provide a lifeline when otherwise solvent banks are temporarily illiquid during a crisis. That is not a bailout. Beyond that, the article commits another rhetorical sin: correlation without causation. Yes, lending standards are much tighter now, but is this because of new rules? Or is it because banks have become naturally more risk-averse post-crisis? Or, is it because the relatively flat yield curve reduced loan profitability, discouraging banks from lending to all but the most creditworthy? In our view, people overrate the efficacy of post-crisis regulations. They didn’t address the primary reason $200 billion in loan losses transformed into nearly $2 trillion of asset writedowns (said reason being FAS 157, the mark-to-market accounting rule, and its now-suspended application to illiquid held-to-maturity assets). Hence adjusting them, at least in theory (since no one knows what Trump will actually do), shouldn’t automatically turn the banking system into the Wild West.

MarketMinder's View: As ever, we advise looking past the trade deficit, as it is a meaningless statistic. It counts imports as negative, even though they represent domestic demand, and it leads one to the weird place of presuming an even trade balance is good and a surplus is better—and by extension thinking protectionism helps. When you consider how many American people and businesses benefit from imports, and the fact that high imports mean high inbound investment, that falls apart. So we look at total trade (imports plus exports), which was down a sliver but basically rounds to no change. Imports rose 1.3% m/m, hitting their highest level in 14 months, but exports fell -1.8%. Falling soybean exports are responsible for about one-fourth of the decline, as they returned to more normal levels following last month’s surge, but exports of industrial supplies and consumer goods also fell. While this is goods exports’ first monthly decline since May, this doesn’t necessarily spell the nascent rebound’s end. ISM’s gauge of manufacturing export orders remains expansionary, and today’s orders are tomorrow’s shipments.

MarketMinder's View: A sage once said the best cure for high prices is high prices—they encourage existing suppliers to supply more and new suppliers to enter the market, alleviating scarcity. Case in point: Last week, OPEC announced an overhyped agreement to cut oil production, and Brent crude oil prices have since risen 14%. (The US benchmark, West Texas Intermediate, is up 12.6%.) But it seems US producers saw this as a chance to gain market share. Using futures contracts, they locked in agreements to sell at these higher prices months down the road, giving them bandwidth to raise production without sacrificing profits. Now, we wouldn’t read a whole lot into the oil futures charts shown here—they’re pretty volatile. But the basic market reaction—supply rising in response to higher prices—is instructive, and it shows why OPEC’s move likely won’t elevate oil prices significantly over any meaningful period.

MarketMinder's View: Here is an easy-to-use guide for headlines referencing the Dow Jones Industrial Average: Do they treat it like the narrow, distorted and broken index it is? If not, then it is probably off-kilter. Such is the case with this article, which unwittingly shows all that’s wrong with the Dow: It has only 30 companies, its sector weightings are skewed, and it is price-weighted, not capitalization-weighted. Beyond that, it’s fairly silly to attribute short-term market movements in any index to just one factor, as this does with politics. It's easy to assert but impossible to prove, as stock prices reflect an incalculable amount of information from countless sources every day. Presidential proposals and speculation are just one input. Ignore economic and sentiment drivers at your peril. Plus, assessing what drove less than a month’s worth of market movement is beyond myopic.

MarketMinder's View: LNG being liquefied natural gas, of course. This is a neat story of how a financial innovation (a global LNG price benchmark, to be precise) will make it “easier to launch futures contracts, which will attract a wider pool of investors while offering the sort of real-time prices currently available in oil, gold and many other major commodities. Companies and investors use commodities-futures markets to speculate on the price of a commodity and to hedge its risk against turns in the market.” Now, before you get concerned about the phrases, “financial innovations” and “speculate on the price of a commodity,” consider the fact studies like this one show opening up commodity trading actually tempers volatility, as more buyers and sellers add liquidity and smooth out price movements. And don’t forget the hedging! LNG producers and investors will be able reduce their exposure to sudden price movements, lowering risk and (in the case of producers) improving their ability to plan ahead. With LNG growing as a global energy source, this tool should be increasingly useful. It’s early, and this effort may prove the latest in a chain of failed attempts to bring futures to natural gas, but it is interesting nonetheless.

MarketMinder's View:20 years ago today, then Fed head Alan Greenspan uttered the following words: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” (Boldface ours.) This piece conjures up that anniversary and imagery to argue markets are looking frothy today, based on the post-US election rally and valuations, which it argues are at their highest levels since 2000’s bubble. The trouble with this logic: Markets have been largely flat for two years, which is kind of un-bubble-like and that Trump rally amounts to a 3% up move at this juncture. Valuations may be higher than at points since 2000, but they are only about half of what they were then and just barely above their long-term average. That’s not frothy, it’s pretty typical. As it pertains to bonds, is anybody anywhere euphoric about the outlook for fixed income? We find mostly fear, as expressed in this piece. Sorry, but signs that “irrational exuberance” has returned are few and far between. Oh, and might we add: Greenspan uttered those words more than three years before the 1990s bull market peaked. Exiting stocks because of his “warning” could have been quite costly. And we’re not singling him out—no policymaker we are aware of, including the present Fed, has a track record of successfully forecasting markets.

By Peter S. Goodman, Neil Gough, Sui-Lee Wee and Jack Ewing, The New York Times, 12/05/2016

MarketMinder's View:This piece does a smashing job demonstrating the global supply chain at work. Consider the recliner described herein, made in the US using many American products. Designers in Michigan create the chair plan—American intellectual property. Local workers affix wood from Wisconsin timber to an American-steel frame—and it’s all assembled in a factory in the States. However! The fabric for the chair, and the electronics that make the recliner actually recline, are imported from Germany and China. The reason: Because those countries currently have the infrastructure and workforce to produce those goods as quickly and cheaply as possible. If one country were to disrupt the supply chain (e.g., through tariffs or import restrictions), that would cause some displacement and unintended consequences. While some economists argue that punitive tariffs from the US would bring jobs back here, that seems unlikely. Automation is already claiming many manufacturing roles, and plus, companies may just shift operations to countries without those barriers. As one business owner quoted here says, “Money and goods will always find their way, regardless of what barriers you put up. You just make it more difficult and more expensive.” This is why we say following trade policy developments—separating talk from action—is key.

MarketMinder's View:Yesterday, Italian voters overwhelmingly rejected Prime Minister Matteo Renzi’s referendum on constitutional reform (59% to 41%). As promised, Renzi announced he would resign, and talking heads are already speculating about the fallout. The result is an avalanche of articles like this one, pondering questions that seem quite a stretch from where things stand today. Questions like: Will the populist Five Star Movement now sweep into power, putting Italy’s future in Europe at risk? Will the uncertainty roil Italy’s banking system, causing a financial crisis? Is the European Project doomed? But realistically, this vote doesn’t mean any of those things. For Italy’s near-term political future, President Sergio Mattarella will likely tap a caretaker government rather than call snap elections, and that means gridlock—more of the same for Italy. More importantly, the referendum’s result also resolves some broader political uncertainty, which is a common theme for this year—that falling uncertainty will help investors see a better-than-appreciated reality. Finally, consider: Markets discount all widely known information, and the referendum’s result wasn’t a huge surprise, as polls showed “No” winning. That’s probably why markets barely batted an eyelash. For more, see today’s commentary, “Italian Referendum Fails, Stocks Smile.”

MarketMinder's View:For evidence populists aren’t running roughshod over in Europe, see Austria’s presidential election—a re-run from May’s contested election. Granted, a couple caveats: The victor, center-left candidate Alexander Van der Bellen, was the former head of Austria’s Green Party and ran as an independent, so this isn’t an “establishment” triumph. (But he is very pro-EU, so in that sense, it’s not in keeping with the narrative of populists upsetting the international status quo.) Also, the presidency is largely ceremonial, with the more important parliamentary elections to come in 2018. Those conditions aside, Van der Bellen’s victory over far-right candidate Norbert Hofer of the Freedom Party is another counterpoint to the narrative of a populist wave sweeping across Europe. Despite all the headlines they command, populists aren’t uniformly grabbing power. Some examples: After 10 months of no government in Spain, the establishment parties formed a minority government, sans far-left Podemos’ support. While France’s far-right Front National will contend for the presidency next year, it has yet to score a major national victory. Elections in France and Germany next year will be telling about populists’ staying power and influence, but for now, concerns about a populist uprising seem overwrought.

MarketMinder's View:If you would like a straight shot of data to go with your regular dose of political theater, look no further: The Institute for Supply Management’s non-manufacturing purchasing managers’ index (PMI) hit 57.2 in November, up from October’s 54.8 and the highest in 13 months, indicating a majority of non-manufacturing (service-industry and mining, principally) expanded. While PMIs give only a sense of growth’s breadth, not magnitude, it does show that many services firms are growing overall—important, since services comprise the largest part of the US economy. Plus, with the New Orders subindex reaching 57.0, more growth in the near future seems likely.

MarketMinder's View:Not to be outdone by its American counterpart, Markit’s UK services purchasing managers’ index (PMI) also rose in November, to 55.2 from October’s 54.5—the fastest rate in 10 months. Here also, new business rose for the fourth straight month and at the second-fastest rate since January. Like the US, services is the primary growth engine for the British economy, so continued growth here is a positive—and more evidence that concerns about the potential negative economic fallout from Brexit were overwrought.

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Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.